By Ellie Winninghoff
While farmland is a hot alternative vehicle among institutional investors like Harvard University and TIAA-CREF, some wonder how alternative an investment it really is.
"[The price of] farmland is traditionally driven by commodity prices, which are set by publicly-traded financial markets," says Craig Wichner, managing partner at San Francisco-based Farmland LP, a private-equity firm that converts conventional farmland to organic, sustainable farmland.
And commodity prices, particularly in the case of corn, can also be influenced by other forces. The Department of Agriculture estimates that forty percent of the corn grown last year was used to produce ethanol, a result of a federal mandate to increase the amount of corn-based ethanol used in the nation's gasoline supply.
While this suggests that farmland values are partly correlated with politics, they are ultimately correlated with population growth and the growing demand for grains, meats and other foodstuffs. Feedlots are the second largest consumer of corn.
According to Wichner, corn-quality land in the Midwest is also correlated with the price of oil--not just in terms of the demand for corn but also with respect to the cost of inputs required to grow it.
"Midwest farmland is a bubble, and while the land is not debt-driven, the system is," he says. "The requirements for ethanol have driven up the cost of farmland and of food, and more land has been taken out of productive uses and converted to corn land.
"Food is correlated with oil, and if you are investing in farmland, you don't want that correlation," Wichner continues. "A great alternative is sustainable ag."
Since 2009, Farmland LP has provided investors with access to un-leveraged and professionally managed farmland using sustainable agriculture best practices. The firm has acquired about 2000 acres--1,100 acres about 50 miles east of the San Francisco Bay area in Brentwood, Calif., and 976 acres near Corvallis, Ore. Its focus is farmland that is close to cities that have a strong demand for locally grown organic food.
Farmland LP plans to hold the land long-term, and to pay investors an estimated 8% net cash flow after the soil has been certified organic in a four- to five-year conversion period. The firm works with family offices and institutional investors, and the minimum investment has recently been raised from $50,000 to $500,000.